Singapore Exchange - Decent quarter amid cost discipline
- 2QFY17 net profit of S$88.3m was in line with expectations; 1H formed 49%/48% of our/consensus full-year forecasts.
- Securities ADVT recovered to S$1.1bn (+10% qoq) due to higher volatility on the back of Trump’s victory in the US presidential elections in Nov.
- Derivative traded volume (+3% qoq) also saw a slight pickup with higher demand for FX futures, rubber futures and iron ore futures.
- Maintain Hold and DDM-based target price of S$7.23.
- Singapore Exchange Limited (SGX) reported a 2QFY17 net profit of S$88.3m (+6% qoq, +5% yoy), Revenue growth of 5% qoq and 3% yoy was driven by a recovery in both securities and derivatives trading volume amid higher market volatility despite Oct-Dec being a seasonally-weak quarter.
- SGX experienced a slight positive jaws ratio, with its EBIT margin expanding to 51.3% (1QFY17: 50.9%, 2QFY16: 50.1%) as expenses were kept in check.
Expenses kept in check; lowering cost guidance for FY17
- Total expenses of S$97.2m in 2QFY17 (+4% qoq, flat yoy) included S$3.6m in professional fees and staff expenses related to its acquisition of the Baltic Exchange.
- This came in slightly below our expectation on the back of:
- better IT vendor management,
- paced hiring according to business needs, and
- more efficient business processes due to its restructuring exercise.
- SGX lowered its operating expense guidance for FY17 to S$405m-415m, down from S$420m-430m previously.
Securities ADVT recovered on higher volatility
- Securities revenue of S$52.1m (+11% qoq, +12% yoy) was boosted by higher securities average daily traded value (ADVT) of S$1,091m (+10% qoq, +17% yoy) amid higher market volatility after Trump’s surprise victory in the US presidential elections.
- November had a particularly strong showing, with securities ADVT rising to S$1,332m (+43% qoq, +37% yoy). The effective securities clearing rate was broadly flat qoq at 2.86bp (1QFY17: 2.89bp, 2QFY16: 2.93bp).
Derivatives traded volume picked up slightly
- Derivative revenue came in at S$75.0m (+6% qoq, -3% yoy). Derivative traded volume rose 3% qoq and 5% yoy on the back of higher demand for INR/USD FX futures (+15% qoq, +21% yoy), rubber futures (+49% qoq, +216% yoy) and iron ore futures (+34% qoq, +81% yoy).
- The average fee per contract was slightly lower at S$1.16 (1QFY17: S$1.18, 2QFY16: S$1.28) as a result of continued competition in iron ore futures.
Look forward to more IPOs in 2017
- CEO Loh Boon Chye guided that the IPO pipeline appears to be healthy, with more listings and funds to be raised in FY17 vs. FY16.
- SGX’s sectoral approach to attracting listings appears to be paying off, with the new IPOs expected to come from the consumer, real estate, infrastructure and technology sectors that they have targeted.
- SGX is trading at 22x forward P/E, which we think has fairly priced in securities ADVT of S$1.1bn in FY17-18F.
- We maintain a Hold rating, with an unchanged DDM-based target price of S$7.23.
- We raise our EPS slightly for lower expenses, partially offset by lower contract processing revenue.
- Upside risks could come from higher market volatility and return of investor confidence amid more positive economic data, while downside risks could stem from the market returning to a risk-off mode amid political uncertainty.